Help! My portfolio's down and my brain won't let me sell!

In periods of market downturn, investors may rightly question their existing investment strategy.  This presents opportunity (or risk) for those in the business of investment advice.  However, there is a common client barrier to make a change.  Investors, who have always been told that they shouldn’t try to time the market, are afraid to sell their existing investments after a major loss.

Clients express sentiments such as, “I can’t sell it now, it’s worth half of what it was a year ago.”  They convince themselves that the prudent course of action is to hold the existing investment until losses are recovered.  In most cases, an analysis of the current strategy versus alternative strategies is not considered.  Investors simply cling to the current investment, hoping that what was once $100 and is now $60 will soon be $100 once again.

Those of us in the business of investment advice tend to approach a client such as this with logic and well researched points to convince them that a different investment strategy is more prudent.  There is a significant problem with this tactic.  Most people (investors, consumers, me, you…) make decisions emotionally and justify them rationally.  Therefore, I thought it would be helpful to explore the emotional roadblocks that investors are experiencing.

Most people involved in the investing business recognize the prevalent emotional reactions to the market:  Greed and Fear.  There is an over simplification, however, in the characterization of these emotions, particularly fear.  We generally think of fear as simply the fear of losing money.  However fear manifests itself in rather different ways.  Fear of regret, fear of feeling foolish, and fear of the number 13 (triskaidekaphobia).  An examination of certain aspects of Behavioral Economics helps us understand the emotions at play.